Vital Signs: How Much Will Shutdown Drag on Growth?

How the government shutdown will play out is still very uncertain. But the U.S. economy has faced shutdowns before. If the standoff persists, year-end gross domestic product growth is at risk because the shutdown started on the very first day of the fourth quarter.

Looking at the 1995-96 experience, a shutdown lasting a few weeks will be a drag on growth. Nondefense federal spending in the fourth quarter of 1995 sliced about 0.4 percentage point from that quarter’s GDP growth. Some of that missed output was made up in subsequent quarters, but real nondefense government spending didn’t return to its pre-shutdown level until the first quarter of 1997.

The critical difference between then and now is that the late-1990s economy was strong, powered by new technologies. Growth from the private sectors easily offset the shutdown drag. The current recovery is quite mild and a substantial drop in the federal government spending will be harder to absorb.

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